What characterizes an acturially fair premium?

An actuarially fair premium is defined as a premium that is set precisely equal to the expected losses that an insurer anticipates for providing coverage, without incorporating any additional costs such as administrative expenses or profit margins. This means the premium reflects the pure risk of loss associated with the insured event.

In this context, an actuarially fair premium serves to balance the insurer's financial risk with the likelihood of having to pay out claims, ensuring that the total premium collected is sufficient to cover only the anticipated claims made by policyholders. It does not include any built-in profit or operational costs, which differentiates it from a typical premium that may include these factors.

Therefore, the characterization of an actuarially fair premium as one that does not provide for profit or expenses accurately captures its essence as being strictly aligned with the measurement of risk and expected losses. This concept is critical in understanding how insurance pricing should ideally function from a theoretical perspective.